Background of Wesfarmers
The Wesfarmers started its journey in the year 1912 by a group of farmers so that the rural workers can get better payment by working less hours. The company in the name the Westralian Farmers limited was registered in 1914 under the Australian Companies Act. The company was started by Walter Harper in order to provide assistance to the rural community. The company intended to promote the products produced by the farmers and make sure they get fair payment for their effort, so thereafter the company became famous as Wesfarmers (Campbell, 2017). Wesfarmers acquired another company named Coles Group which is considered as one of biggest takeover in Australia for $19.3 billion (Wesfarmers, 2016b; Biddle, 2016). Later, the company set up three departments which include Coles, Target and Kmart. A secondary research which include newspaper article, has been conducted to analyse the problem. The problem where the Earnings before Interest and Tax (EBIT) of the company was increased by $21 million due to superficial rebate is arranged from the suppliers in return to pay them much higher prices for their products later. The various techniques are discussed in a detail which helps to eliminate the waste and it will also make the process more efficient.
Problem
The accounting scandal in the departmental store target has heavily affected the reputation of the company Wesfarmers (Wesfarmers, 2016a). A group of employees working in Target have inflated the earnings of the retailer almost by $21 million. These employees chalked out a strategy where the suppliers are asked to provide a superfluous rebate in the first six months of the year and in return higher amount will be paid for their materials in the next six months. This is reason the earnings before interest and tax of the company showed around $74 million whereas in real it was $53 million.
Analysis
It is evident from the earnings before tax and interest that the company is making huge profit. This is because the employees of Target have manipulated the inventory system (Parker, 2016). It was shown that the inventory is going down due to an increase in demand. The management team of the company Wesfarmers brought this matter to the attention and as a result, a detailed audit was carried to investigate the issue with the help of the external auditors. The investigation carried by the auditors hired from the company Ernst & Young showed that the contracts made with overseas suppliers did not followed the accounting standards. Wesfarmers took necessary action against the employees those were found to be responsible. The Chief Executive Officer Guy Russo and Marina Joanou who is the Finance director of the company together decided to merge both the department stores into a single unit (Parker, 2016). These two stores are the Target and Kmart.
- Why the company has not implemented any techniques to reduce the waste?
- Why materials are always ordered in bulk?
- What are the steps taken by the company to control the flow of materials?
- Why the company has not taken the feedback from its employees regarding the stress related to the work?
The Accounting Scandal at Wesfarmers
Accounting theory is based on assumptions and framework related to the accounting (Purba and Tambunan, 2018). There are various accounting theories that can be used by the companies such as First-in-First-out (FIFO), Last-in-Last-out (LIFO), weighted average and specific identification. The concept of FIFO explains that the materials are first issued from opening stock which was purchased earlier and then gradually moves in an order that is chronological in nature. The materials remain unused in the warehouse reflects the price currently prevailing in the market (Accounting for management.org., 2018a). This method is not complex in nature rather the operations are simple to use. Staffs with little less knowledge in accounting will able to work with this method. It is used when there is less number of transactions but this method shows an increase in net profit during the time of inflation. In this method the possibility of obsolescence is reduced as the materials are issued from the stocks that are purchased earlier. The remaining stocks in the warehouse reflect the current price of the materials prevailing in the market. In other words, costs that are historical in nature are compared with the revenues earned in the current year and the result is recorded in cost of goods sold (cogs). Therefore, the gross margin that arises does not reflect the real position of costs and revenue (Accounting tools, 2017a). FIFO method is accepted by the International Financial Reporting Standards and there will no difference in the results if the company uses perpetual or periodic inventory system.
LIFO is a method where the materials are issued from the latest purchase and the older items remain unused in the warehouse which leads to an increase in obsolescence (Accounting for management.org., 2018b). This can be one of the reasons for using LIFO method less used in comparison to the other methods. The unsold items in the inventory with the historical prices are included in the cost of goods sold while it is suppose to include the latest price of the items. The company can portray a reduction in the level of profit if the stocks with higher price are included in cost of goods sold. Thereby has to pay less amount of tax and this is the reason this LIFO method is banned by the International financial reporting standards. This method can be used in the United States after taking approval from the International Revenue service (Accounting tools, 2017b). This method utilizes the materials that are highly priced during inflation helps to match with the revenue earned and thereby reducing the inventory profit. Less amount of tax is paid due to this reduction.
Different Accounting Theories
In the weighted average method, costs incurred for purchasing the materials are distributed equally among all the units (Chron, 2018). The total cost includes the price of the materials purchased bought earlier as well as during the year. Weighted average does not involve lots of calculation in comparison to FIFO and LIFO methods (Simeon and John, 2018). This methods helps in reducing the paperwork as the calculations are done on the basis of the single unit cost. This single unit cost is the average cost that is assigned to the product during the production. It becomes impossible to identify the specific cost for each unit as the items of the inventory are so fraternized.
The specific identification is a method where every single items lying in the warehouse can be identified (Accounting for management.org., 2018c). The company will know the exact number of unit ordered on a specific date. This method is generally use for the valuation of the larger items which includes vehicles or furniture. It can also be used for identifying securities having different characteristics. The investors can choose different securities that will help to offset the capital gains. Specific Identification maintains proper records regarding the materials and keeps a track regarding each item in the warehouse. The costs of the items that are specific in nature are included in the cost of goods sold (cogs) (Moheb-Alizadeh and Handfield, 2018). The cost of the materials can be matched with physical existence of the inventory. It can be shown that the items with lower price are sold and only the items with higher price are left in the inventory. Thus, the net income can be manipulated with the help of this method and the company will also have to lesser amount of tax.
The company follows the First-in-First-out (FIFO) where bulk amount of materials are ordered and stored in the warehouse. The company did not maintained proper records regarding the huge purchase and as a result, the employees showed a reduction in the inventory stating that there is an increase in the demand for the product. This is an easy method when it comes to operation and it does not require specialized knowledge for using this method. One of the main disadvantages on using the FIFO method is that the net profit can be manipulated which is done in this case. The earnings were increased to $74 million just to show that the financial position of the company is in a good state and the sales are also increasing. The company has no control over the flow of the supplies and it also made no further assessment regarding the requirement of the materials.
Improving Production at Wesfarmers
The company need to stop buying bulk amount of materials which finally deteriorates the cash position of the company. It is because materials are being bought more than the requirements. Thereby, it leads to wastage and misuse of materials. The company should take initiation in implementing the techniques to control the wastage of the materials. There are various techniques such as improving the quality of the products, eliminating the waste, reducing the lead time. There are more than one supplier from whom the materials are purchased and each of them quotes different price for their materials. The quality of the materials also varies with the price, so the company must select the suppliers providing the best quality. The quality of the product helps to grab the attention of the customers in the market. The company will remain certain regarding its product quality. The company will able to eliminate the waste by keeping a detail account of all the activities involve in the producing the product. The company due to less wastage in production will increase the savings. The price of the products will not be increased by the company in order to recover the loss incurred from the waste. The term lead time refers to the gaps that are consumed in completion of a task or time taken in between the stages involved in a process and this will to lead to an improvement in the production. The company can also concentrate on reducing the overall cost of the products which includes both the indirect and direct expenditure. The expenditure that are incurred for being directly involve in the producing the goods are known as direct cost (Shepherd, 2015). Depreciation is an example of direct cost. The expenditures that are incurred for not being directly involved in the process but it is a part of the production.
The company can also utilize the concept of Economic Order Quantity (EOQ) and with the help of this EOQ will able to chalk out the numbers of units require to order (Shinn, 2018). The company will able to improve its inventory by constant monitoring the flow of the materials and there will no materials unnecessarily lying in the warehouse. The company can order same number of units from their supplier as soon as the inventory reaches the reorder level. The company will have control on usage of materials and there will also be no scope for materials (Jawad, Jaber and Bonney, 2015). This model is based on the assumption that the demand remains constant and the inventory keeps decreasing until it reaches the point where there is no material. The materials will be ordered at such a gap where the moment the supplies are entirely finished, the warehouse will be refilled with supplies (Kazemi et al., 2015). The company will not have to pay storage cost for a longer period of time. The company will order small quantity of materials rather than ordering a bulk amount.
Just-in-Time (JIT) is another unique technique that can be used to eliminate the waste in production. The JIT system is generally used as the strategy by the management of the company where the materials are issued as per requirements (Ukil et al, 2015). The system remains aligned with the schedule of the production and thereby supplies the materials directly to the departments according to this schedule. This technique helps to improve the efficiency of the process (Pérez and Torres, 2019). It is because the materials are supplied only when there is a requirement for it. JIT helps in reducing cost just like the EOQ model and the companies will have order less materials in comparison to the earlier orders. The excellence of the products will also be maintained as best qualities of materials are used in the production (Cottam and Ranson, 2017). The benefit of implementing the JIT system is that the company will no longer hold the safety stock and the operations can be carried smoothly with even the level of inventory is low and helps to eliminate the waste (Shay, 2015). JIT helps to increase the return on investment also known as ROI by reducing unnecessary expenses (Capps, Williams and Welch, 2017). The ROI is used to measure the amount of gain or loss generated from the investment in comparison to the amount that has been invested by an individual or a company (Nabieva and Davletshina, 2015). It is calculated in percentage and the formula is:
ROI= (Net Profit/ Total cost of Investment)*100.The ROI is calculated taking all the potential investments into account which helps the company to understand how well was the decision to make an investment in the projects. Individuals, on the other hand, calculate the return that can be earned from the stocks markets. ROI is the also known as profitable ratio
Conclusion
The Wesfarmers being one of the most renowned company in Australia has expanded over the time by setting up three separate departments which includes Target, Kmart and Coles. The group of employees of the department Target were able to manipulate the records related to the inventory because bulk number of units are ordered and remain unused in the warehouse. The parent company Wesfarmers never investigate regarding the purchase of materials and no proper records were maintained by the company. Wesfarmers was reluctant towards the department Target and very less effort was given towards the improvement regarding the management of the company. The employees as a result showed that the stocks are going down due to high demand for their product in the market. The company can implement the techniques such as Economic Order Quantity (EOQ) where the small quantity of units can be ordered instead of mass amount of materials. This will help to make the process efficient and it will also improve the inventory system of the company. The company will know the amount that will require in the producing the products and as a result it will not have to incur huge amount at a time for placing the orders. The company can also implement the JIT technique in its inventory system which will help to eliminate the waste and thereby it will lead to saving in money. Materials required in the process will only be issued when it is needed and there will be no sign of excess material in the warehouse. The company has not taken much initiation in taking the feedbacks from their employees regarding the work and its pressure.
References:
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